Cerulli: Fee-Based Compensation Goes Up, Revenue Goes Down

The fee-based revenue model for advisers shows cracks because of volatile markets, according to research from Cerulli Associates.

As fee-based advisers are tied to the revenue of clients, the market downturn has affected adviser revenue, according to Cerulli. Meanwhile, the trend of advisory firms toward going fee-based continues.

Nearly two-thirds (64.5%) of advisers surveyed in 2008 employ a fee-centric revenue model (fee-only and fee-based), up from 2007’s 49.6% of advisers, according to a release from Cerulli about the consulting firm’s latest research.

Based on quarterly surveys of advisers last year, Cerulli defined fee-only advisers as advisers who generate more than 90% fee revenue; fee-based advisers generate 50% to 90% fee revenue. There are also fee-and-commission mix advisers (10% to 50% fee revenue) and commission-only (up to 10% fee revenue). Almost a quarter of advisers (about 24%) are fee-and-commission mix. “Over the last few years, B/Ds and their advisers had looked to fee-based accounts as a revenue driver,” said Scott Smith, senior analyst at Cerulli and co-author of the report. “These accounts helped create long-term advisory relationships as well as a stream of recurring revenue, both of which substantially build the value of an adviser’s book of business.”

Although the trend toward going fee-based has been cited by research in the wealth management arena (see “The Top Wealth Management Trends for 2009), it is certainly evident for retirement plan advisers as well (see “A New Dimension).

“As investors seek out additional investment advice as part of their financial relationships, fee-based relationships are becoming the industry standard and will continue to grow in popularity,” Smith said. “Not only do fee-based relationships eliminate much of the conflict of interest associated with transactional brokerage relationships, but they align client interests with those of an investor’s as the adviser’s revenue is explicitly tied to a growing asset base. Additionally, fiduciary standards are an inextricable part of fee-based investment.”

However, while the distrust of financial institutions right now might make being fee-based more attractive in order to eliminate the conflict of interest associated with commissions (see “Worried Americans Prefer Fee-Based Advisers“), Cerulli noted that the financial crisis is also taking a toll on fee-based advisers’ revenues.

Because revenues of fee-based advisers are generally tied to assets under management (AUM) levels, a major shock to the markets will have a direct impact on an adviser’s paycheck and adviser-related revenue at broker/dealers (B/Ds), Cerulli said. With markets down 20% to 30% in 2008, advisers will need to consider a few options if they are hoping to keep their income relatively steady. “Advisers have a limited number of options in the current environment to create additional revenue,” Smith said. “They can expand their client base, and their asset levels. Or they can alter their product mix, possibly by increasing their attention to insurance products, which would increase their commission-based revenue.’

The research is from Cerulli Quantitative Update: Advisor Metrics 2008. More information is available at www.cerulli.com.